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What is the Difference Between a Trust and an Estate?

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When planning for the future, we all want our assets protected and secured. That’s why trusts and estates are two important legal solutions that ensure your heirs and beneficiaries will inherit what you wish them to without complications.

A recent research study revealed that with over half of Americans recognizing the importance of estate planning, it’s shocking and concerning that only 33.1% have taken the necessary steps to create a will or living trust.

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While 1 out of 3 US people believes they don’t have enough assets to need estate planning, the main reasons for not having a plan are often procrastination, not having enough time, or not knowing how to start.

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Understanding the different aspects of the estate planning process can help alleviate some obstacles associated with this important process. This blog post will help you understand the key differences between a trust and an estate.

What is a Trust?

A trust is a legal document that allows you to control how and when your estate assets are distributed after you pass away, what happens if an heir is incapacitated, or even who can receive the assets.

When you create a trust, you must appoint someone as the trustee who will manage and distribute your assets to the beneficiaries.

A trust document is a vital part of any comprehensive estate plan. Make sure to use it to its fullest potential and supplement your other estate planning options to honor your final wishes.

Why Start a Trust?

Tailoring a trust to your specific needs is the best way to make sure that your loved ones are taken care of after you’re gone. It allows for greater control over who receives what and when, and how much tax liability there may be on the assets.

Revocable Trust 

With a revocable trust, you have much more control over the assets than other estate planning documents, such as a will. This trust allows the trustor to control the assets during their lifetime and change the terms of the trust anytime.

The vast majority of trusts we are familiar with are revocable, meaning the individual remains in control of their assets, and the trust merely assists them in overseeing those possessions. Please ensure you have the updated documents of your trust property.

Irrevocable Trust 

On the other hand, an irrevocable trust does not give the trustor any control over the assets once it’s created. This trust is primarily used for asset protection and tax planning purposes.

After it is established, an irrevocable trust remains with its beneficiaries as long as they abide by all terms and conditions. No one else can change these terms and conditions, and the trustor cannot revoke them.

Asset Protection Trust

An asset protection trust (or APT) is designed to protect assets from creditors, lawsuits, and other legal challenges. This trust is often used for wealthy individuals who want to shield their assets from potential creditors or lawsuits.

This is an irrevocable trust, meaning the trustor cannot access or control their assets once they are transferred to the trust. The assets of this trust can only be used for specific purposes set out by the terms of the trust.

Spendthrift Trust

The spendthrift trust is similar to an asset protection trust but has a few key differences. This type of trust is specifically designed for beneficiaries who may be irresponsible with money or need assistance managing it.

In a spendthrift trust, the trustee manages the assets and distributes them according to the instructions set out in the trust. This ensures that the beneficiary receives only what they need and protects the assets from being squandered or mismanaged.

Charitable Trust

A charitable trust is a type of trust that is used to benefit a particular charity or cause. This trust allows the donor to put money aside for charity and designate how it should be used.

Charitable trusts are often used by wealthy individuals who want to make sure their money goes towards causes that they care about most. Depending on the type of trust, the donor may also receive a tax benefit for setting up this type of trust.

Special Needs Trust 

A special needs trust is designed for individuals with a disability. This trust allows the beneficiary access to funds without risking their eligibility for government benefits like Medicaid or Social Security Disability Insurance (SSDI). The trustee manages the assets and distributes them according to the instructions set out in the trust.

The funds from this type of trust can supplement the beneficiary’s basic needs, such as food and clothing, but may not be used for luxuries. This type of trust helps protect the beneficiary from losing their government benefits while still allowing them access to much-needed funds.

Constructive Trust

A constructive trust is a type of trust created by the courts to resolve disputes between parties. This type of trust can be established when one party wrongfully holds money or property that rightfully belongs to another person. The court will order the wrongfully held funds or property to be transferred into a constructive trust, which will be managed and distributed according to the court’s instructions.

Constructive trusts are often used in fraud, breach of contract, or other legal disputes when one party has wrongfully taken possession of someone else’s money or property. This type of trust allows the court to intervene and ensure that the rightful owner gets what they are owed.

How to Create a Trust?

Creating a trust is a proactive way to protect your assets and ensure that they are distributed according to your wishes. To create a trust, you’ll need to work with an experienced attorney who can help you set up the trust and draft all the necessary documents.

Step 1: Creating Asset Inventory

The first step in creating a trust is to create an inventory of the assets you want to include. This includes money, real estate, investments, and other items of value you would like to be part of the trust. With asset inventory, you can get a precise understanding of the type of property that you hold to decide which beneficiaries will receive it based on your chosen terms.

Step 2: Appointing a Trustee

The next step is to appoint a trustee. The trustee will manage and distribute the trust assets according to your wishes. Choosing someone you trust with experience managing funds is essential, as they will be legally responsible for carrying out your instructions.

Step 3: Finalizing Trust Documents

Once you have created your asset inventory and appointed a trustee, you must draft the trust documents. These documents will outline the terms of the trust, including how the assets should be distributed and managed. You will also need to name beneficiaries of the trust who will receive those assets when they are dispersed.

What is an Estate?

An estate is the total amount of a person’s property and assets. This includes any real estate, investments, money, or other items of value they hold. An estate may also include debts owed to creditors by the deceased person.

Any money, belongings, or assets not held jointly with someone else and not previously transferred or assigned before your death will be included in the estate for distribution to your heirs. The people who receive money, property, and other possessions from the inheritance will be considered their heirs.

When a person passes away, their estate goes through probate court, and any outstanding debts, taxes, or other obligations are taken care of before the remaining assets are distributed. An executor is appointed to manage the estate through the probate process and ensure that its assets are transferred according to the deceased’s wishes.

What is the Purpose of an Estate?

The primary purpose of an estate is to protect a person’s assets and distribute them according to their wishes after they have passed away. This helps to ensure that those assets are not subject to creditors, taxes, or other obligations and can be distributed in a way that benefits the deceased’s heirs. An estate also serves as an essential tool for financial planning and can help protect family members from paying large amounts of money in taxes after someone has passed away.

An estate is a temporary arrangement. It is established to quickly and effectively distribute all of the assets. Once everything has been distributed accordingly, the estate is no longer in existence. However, an estate can take years to settle and be distributed, depending on the size and complexity of the estate.

Oftentimes, there is significant confusion about the degree of control one has over their will. Despite state regulations that decide who inherits when someone dies without a valid will, most states have limited limitations regarding how possessions are dispensed through a testament. In effect, if you die with an active and legitimate last wishes document in place, you can leave your belongings to whoever you decide on!

How to Distribute an Estate?

There are two ways to distribute an estate: through a will or a legal chain of inheritance as per the nature of the estate. If a person dies without having created a will, their estate will be distributed according to the laws of intestacy in their resident state.

A Will

A will is a document that outlines the deceased’s wishes and desires for the distribution of their estate. It typically includes specific instructions on who the beneficiaries are, how much they should receive, and what assets should be given to them.

Should the deceased possess a validly signed will at the time of their passing, then all assets shall be distributed in accordance with that document. Without a will, the estate is distributed to any living relatives according to their state’s laws on intestacy.

Legal Chain of Inheritance

If a person does not have a will, then the estate must be distributed according to the intestate laws of their resident state. In this case, there is a predetermined order in which the deceased’s assets are distributed.

The most common distribution methods are determined by marital and/or familial relationships. In almost every state, inheritance is first granted to a spouse and then to any children. If there are no surviving family members of these two categories, the line will be extended to parents before branching out into more distant relatives.

Debts, Taxes, and/or Fees Come First

When a person passes away, their estate must be settled. This includes any outstanding debts, taxes, or fees associated with the estate. These must be paid off before the remaining assets can be distributed to the heirs.

In the unfortunate event of passing, creditors and bill collectors are entitled to be paid before any inheritance can be distributed for both a will and through the legal counsel. Consequently, if necessary, property may need to be liquidated for all debts owed by the deceased person to be covered. If these bills exceed what is within the estate’s means, then, unfortunately, no heir will receive anything at all.

Furthermore, when a person has acquired remarkable wealth, their estate could be liable for hefty estate taxes determined by the value of what’s been inherited. With such substantial sums involved, it is clear why those possessing vast fortunes must pay these high rates. If applicable, estate taxes are drawn from the taxable estate itself.

Finally, all estates must pay legal and administrative fees associated with settling the estate. These include court costs, executor fees, and other expenses necessary to close an estate. For example, if an estate requires management or a will requires probate, these associated costs must be considered before any heir can receive their inheritance.

Difference Between a Trust and an Estate: Final Words

A trust is a separate legal entity that operates independently of any individual. It is often used to protect and distribute assets before someone’s passing and during their life. For instance, the trust’s creator will set it up so that it can operate with or without them managing the assets, thus making it a secure vehicle for protecting and distributing an inheritance.

In contrast, an estate is simply the sum of a person’s possessions; in other words, it is all the property, money, and assets owned by one individual at a given time. Estates can be distributed through wills or legal chains of inheritance when an individual dies.

A trust is an estate planning tool that can be used to manage and protect assets before, during, and after death. On the other hand, an estate is simply the value of all possessions owned by one individual at any given time. With these fundamental differences in mind, it’s easy to understand why trusts are often preferable for protecting and distributing assets, as they provide more control and flexibility than estate distribution.

Ultimately, trusts and estates are important asset management and protection forms. With the proper planning and guidance, they can ensure that your loved ones are provided for in the event of your passing. Understanding all aspects of estate planning is essential before deciding on the best way to distribute your assets.

How Can Pace & Associates CPAs, LLC Help?

Drafting wills, trusts, and other legal documents is imperative when deciding who will receive your assets following your death or during your lifetime. Pace & Associates CPAs, LLC is here to help make sure your estate plan is tailored to meet your needs and wishes.

At Pace & Associates CPAs, LLC, we understand that estate planning can be complex and emotional. From drafting wills to setting up trusts, our team of professionals will help you create an estate plan tailored to your needs.We are dedicated to helping you make informed decisions to protect yourself and the people closest to you. Our experienced staff is here to guide you through the process and help you make the best possible choices. Contact us today to learn more about how we can assist you with your estate planning needs.

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